This article was published in the November issue of Utilities magazine.
In recent weeks, energy product futures have been traded differently on European markets. The new wave of coronavirus and the introduction of restrictions in a number of European countries are driving downwards the prices of electricity futures. The reason is the expected decline in consumption and to some extent similar situation like in March and April, when electricity prices hit their lowest levels.
At the same time, in September, spot markets in both Western and South-Eastern Europe began to recover from pre-crisis levels. There were consecutive days with prices over 50 € / MWh. At the same time, the Bulgarian Independent Energy Exchange (IBEX) was a record holder for several days in terms of the highest DAM price for electricity, even ahead of the most expensive market in the region – Greece. As a result, traders have started importing electricity to Bulgaria from cheaper neighboring markets. In some days in October Bulgaria became a net importer. Such periods in September were also no exception. The reason was the reduced supply on the Bulgarian market, caused by the annual overhaul of the sixth unit of Kozloduy NPP in the interval 22.09.2020 to 24.10.2020. This shortage was mainly offset by imports, but due to higher price levels in the region, IBEX daily prices often exceeded 100 BGN/MWh. However, the average DAM price remained at 89.73 BGN /MWh, which is significantly lower compared to the same period last year, when it wa over 110 BGN/MWh.
With regard to the regional futures (Figure 1), the trend is downwards for both the winter months of 2020 and the first quarter of 2021. These are usually the periods with the highest prices due to increased consumption and the need to activate more expensive power plants – coal and gas. The price drop during the last month is in the range of 2-3 euros per MWh and as already mentioned is dictated by the deteriorating situation with the coronavirus, but also by the good prospects for the upcoming winter. Long-term meteorological models give indications of a milder winter with average temperatures higher than normal. This, together with the good prospects of hydropower in Bulgaria, Greece and Romania, put downward pressure on the prices. However, it should be noted that spikes in spot prices are not to be excluded, especially in the Bulgarian market, where in recent months almost all the supply is on the sport market. As a result, traders cannot ensure long-term price predictability (to purchase quarterly, six-month or annual products) because power producers do not offer such long-term products. The negative effect can be manifested in severe weather conditions, when consumption will increase dramatically and spot prices as. These spike prices on the IBEX spot market will be transferred to the end customers. Balancing energy is also tied to the spot price, so in these colder periods, balancing costs can also be significant.
Figure 1. Electricity baseload future on the HUDEX (Source: HUDEX Hungarian Derivative Energy Exchange)
If we look at the markets for energy products, we will notice interesting patterns. Natural gas usually follows the trends in crude oil prices. However, we are currently seeing a distinction between the two. Oil declines (Figure 2), mainly due to the lower economic performance of the leading economies, while at the same time the prices of natural gas traded in Europe do not stop rising, exceeding 15.5 € / MWh in December futures (Figure 3) . Gas demand in Europe is also rising, and so are the prices. Excessive capacities in gas storage facilities are declining. On the other hand, if Covid-19 cases continue to rise in Europe and restrictions are further tightened, it is likely to affect gas demand even during the peak season. In the summer, Europe canceled many LNG deliveries because of declining demand, and imports of pipeline gas from Russia also fell sharply. In the future, these flows are likely to increase again, given price growth, and the cancellation seems to have peaked as fewer and fewer LNG supplies are canceled.
Figure 2. Crude oil futures for December 2020 (Source: ICE FUTURES EUROPE)
Figure 3. Natural gas futures for December 2020 on the Dutch gas hub TTF (Source: ICE INDEX Dutch TTF)
The emissions market, for its part, is also vibrant. After a seemingly high increase in the summer months to over 30 €/tonne, at the end of October the December future, which is a benchmark for this market, trades at levels of 23.56 €/tonne, which is the lowest value of the 100 days moving average. However, we also see a reverse upward trend, ie. the market this month is quite volatile with sharp changes in one direction or another.
According to market participants, the rise in prices during the summer months was dictated by the participation of large investors, such as banks and hedge funds. They introduced significant capital and increased demand. The emission market is greatly influenced by both demand (supply is limited) and the European Union’s policy decisions and climate goals. In this regard, and in view of the forthcoming decision to increase the emission reduction target to 55% or 60% by 2030, a significant effect on the emission’s market is expected. Analysts have very different expectations for the exact development of emissions prices in 2021, and they are mainly in the price range between 30 and 40 €/ton.
Figure 4. Emission allowance futures for December 2020 (Source: ICE FUTURES EUROPE)
Volatile winter months are coming for the energy markets, a number of factors will influence the price levels of energy products. The development of the second wave of the pandemic, the meteorological situation, economic indicators and political decisions will be among the driving forces influencing prices. It is their combined effects and the uncertainty that lead to an increase in volatility and impose risks to long-term planning.
